CBOE, CME to jump into bitcoin futures trading

Bitcoin futures are coming to Chicago’s two main financial exchanges, allowing investors to bet on price swings of the prevailing digital currency and providing perhaps the biggest validation yet to a financial product that’s still largely unknown by the average consumer.

The Chicago Mercantile Exchange and the CBOE Futures Exchange are the first traditional exchanges to wade into the cryptocurrency market, lending legitimacy to the digital asset even as regulators warn investors that they could be in for a bumpy ride.

The move means investors will be able to bet on changes in bitcoin prices without actually buying bitcoin itself. Northwestern law professor John O. McGinnis called it a major moment in bitcoin’s climb “up the ladder of respectability.”

Bitcoin was created in 2009 as an alternative to government-issued currency, and can be purchased through online marketplaces. A number of big companies accept it, allowing users to buy everything from a sandwich at Subway to a plane ticket on Expedia.com to software from Microsoft. But because it isn’t regulated by a country or other single entity like traditional currency, it can be extremely volatile. Many observers fear that bitcoin’s bubble could eventually burst.

Its price, which started at just pennies in 2010, was $1,000 at the beginning of this year and has surged more than tenfold since then. Earlier this week, the price of a single bitcoin moved past $11,000 before dropping. It gained 8.75 percent Friday to close at $10,783.93.

Those kind of swings have created some high-profile detractors. JPMorgan Chase CEO Jamie Dimon has called it a “fraud” and Goldman Sachs CEO Lloyd Blankfein said it was too early to consider embracing it.

But while it’s riskier than the U.S. dollar, bitcoin is actually a safer investment that some countries’ currency, like Venezuela’s, McGinnis said.

The Commodity Futures Trading Commission said it had discussions with the exchanges to protect consumers from extreme price swings. The exchanges have agreed to “self-certification,” or a pledge that the new instruments will not break federal securities laws.

The Merc plans to launch bitcoin futures trading Dec. 18. CBOE Chief Strategy Officer John Deters said that exchange will launch trading “very shortly,” although an exact date has not been set. Several media outlets also have reported that the Nasdaq may be getting in on the game next year too.

The CFTC said it had “rigorous” discussions with the Merc during the past six weeks, with CBOE for the past four months and over the phone with Cantor Exchange, which will begin trading bitcoin binary options. The commission said it had put in place certain safeguards.

The CFTC also sounded a cautionary note about the “potentially high level of volatility and risk” in trading the largely unregulated product.

“Bitcoin, a virtual currency, is a commodity unlike any the Commission has dealt with in the past,” CFTC Chairman J. Christopher Giancarlo said in a news release. “As a result, we have had extensive discussions with the exchanges regarding the proposed contracts, and CME, CFE and Cantor have agreed to significant enhancements to protect customers and maintain orderly markets.”

He added, “Market participants should take note that the relatively nascent underlying cash markets and exchanges for bitcoin remain largely unregulated markets over which the CFTC has limited statutory authority.”

CBOE’s Deters said the exchange is confident the currency is at a point where it has reached legitimacy and widespread acceptance among investors.

“We’ve been observing the market for quite some time, and we’ve concluded it is here to stay,” said Deters, who predicts bitcoin futures will have broader interest than traditional futures contracts.

Acknowledging the significant warning from the CFTC, CME Group Chairman and CEO Terry Duffy said the exchange will continue to work with the commission and clients to manage risk, noting the exchange put a number of measures in place to control volatility, like position and price limits.

“Though we have worked through a lengthy, comprehensive process with the CFTC to get to this point, we recognize bitcoin is a new, uncharted market that will continue to evolve,” he said in a news release.

Northwestern’s McGinnis said the biggest risks for the currency going forward are mainly from government intervention. But he predicted that, as bitcoin gains clout with investors, it will become more unpopular to regulate it. He likened it to the current fight against Uber and Lyft from public officials who want to limit the services, only to see a public backlash from loyal users.